Internet-based auctions are a growing market that generates vast revenues. One auction house alone (Ebay) handles $50 billion in annual gross merchandise volume, with an annual growth rate of over 10%. The volume is so high that relatively minor optimizations in transaction efficiency can yield large rewards.
Due to Internet bidders being physically separated from each other, Internet auctions have evolved a system of proxy bidding. In proxy bidding, bidders do not place their bids directly against each other. Rather, they define a “maximum” bid they are willing to make; then, as other bidders set their amounts, the proxy system places increasingly higher bids up to the defined maximum. If a potential buyer is outbid, the proxy system will notify them (typically by email) and allow them the opportunity to raise their maximum bid.
Current online proxy bidding is designed to simulate a face-to-face auction, but it has serious deficiencies. First, it ignores the psychology of the typical bidder—most buyers do not know the maximum they are willing to pay until they are actually outbid. A subconscious level of distrust in a proxy system may also be involved. Many buyers will bid only high enough to beat the current bid, and if outbid by the proxy system, may eventually define a higher maximum. Historical data for online transactions support this, with very few users placing their highest bid immediately.
A second and more serious problem exists. Many people, knowing this innate tendency to underbid, will defer their own bids until the final few seconds of an auction. By the time the system has notified the previous high bidder that they have been outbid, the auction has closed. Thus, they circumvent the possibility of being outbid.
Both the above issues act in concert to reduce the efficiency of online auctions, and prevent their extracting the maximum sale price from each transaction. As auction house revenues are based off gross sale volume, this is a serious issue for such businesses.
There therefore remains a need for a cost-effective technique to conduct and manage online proxy bidding, while minimizing the above-described disadvantages.